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PARK Bun-Soon

Taiwan and China: From Confrontation to Cooperation?

PARK Bun-Soon

June 29, 2005

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Tension has considerably eased in the Taiwan Strait. Concerns over the cross-strait relations rose last march when Beijing ratified the anti-secession law aimed at outlawing Taiwan's independence. This law formalized China's "right" to use force against Taiwan in the event of its proclamation of independence from the mainland.

The high emotion that used to dominate the cross-strait relations has dissipated since April, after the visit to China by Lien Chan, head of the opposition Kuomintang (KMT) and Soong Chu-yu, president of People First Party (PFP). Their talks with China's top leadership have given rise to a new sense of euphoria. Taiwan President Chen Shui-bian, who has hardly been on good terms with Beijing, had even asked Soong to take a personal message of conciliation pledging a peaceful resolution of differences. The improving atmospherics between the two sides has prompted China to consider sending mainland tourists to Taiwan .

It's a welcome development, but President Chen's drive for independence looks unlikely to get a new boost at this stage. The public opinion remains acutely divided over the issue, the business community is strongly opposed to independence drive creating more wave at this stage, and pressure from Beijing against it has risen.

So far, the Taiwan-China relations have been described as "economically hot, but politically cold" - the island's exports to the mainland totalled US$45 billion in 2004 while imports amounted to US$16.7 billion, leaving a huge surplus in favour of Taiwan . Taiwan is also a massive investor in China, with US$42.5 billion worth of investments in 33,000 projects at the end of March this year.

These official figures are misleading, however. Unofficially, Taiwan's total investment in the mainland runs as high as US$100 billion. A significant part of this total has been invested through tax havens in other countries. Today, over a million Taiwanese people live and do business in China, a half of them concentrated in Shangha, the major center of Taiwanese investment.

Amazingly, this huge volume of investment has been carried out in spite of the government's lukewarm policy, stemming from the government's concern over relocation of advanced industry to the mainland and the impact of industrial hollowing-out this creates for Taiwan . The island is also worried over its economic dependence on the China market. Under such concern, the government has restricted the state-owned enterprises from developing business collaboration with the mainland.

A significant improvement in the bilateral economic cooperation however will strengthen Taiwan companies' own competitiveness. A reduction in political tension will also improve the environment for Taiwan's investment in China. A strong economic cooperation between the two sides will cut cost of Taiwan business operating in China. It will allow Taiwanese businessmen to fly direct to China without detouring through Okinawa or Seoul .

At the same time, if Taiwan attracts a fraction of the estimated 10 million tourists from the mainland to Hongkong each year, that will have the effect of boosting Taiwan's domestic economy. Removal of restrictions against the state-owned enterprises doing business in China will enhance Taiwan's competitiveness in the cross-strait relations.

A further degregulation in Taiwan's investment rules therefore will have a constructive effect. Taiwan companies in China mostly manufacture goods under OEM (original equipment manufacturing) arrangement for foreign brands. Taiwan's regulations also hold them back from moving more forcefully into China's domestic market, thus allowing Korean, Japanese and other multinationals to outpace them. If the cross-strait relations improve, they can better exploit this vast market. Their investment can spread to steel, petrochemicals, and semiconductors.

A substantial part of Korea and Taiwan's investment in China has focused on exports to the US markets. However, a global economic slowdown or political strains in the Sino-US relations can negatively affect China's future export growth. Thus China must develop its domestic demand to maintain a continuous growth. Taiwan's active participation in China's domestic market will enhance competition among Korean, Japanese and other multinationals. That will make the value of competitiveness in price and quality an overriding factor in the China market.

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